Market Surveillance 2020: MAR the Game-Changer

​Rebecca Healey, European Consultant to TABB Group, has more than 20 years’ experience in e-trading and financial services. She has held various positions in sales and trading positions with Bankers Trust, Goldman Sachs and Credit Suisse, where as vice president she launched the AES product to hedge funds from its inception in 2002 until 2008. Prior to the AES launch, she was the first electronic trader at Credit Suisse to be registered for all electronic European Cash Equity Markets and covered sales trading into Asia and Europe from 1997 to 2000. More recently she has focused on the impact of European Regulation on Capital Markets today.

Just a few years ago, compliance monitoring might have involved wandering downstairs to listen to taped phone conversations in the basement. Not any longer. The world of compliance has undergone radical transformation. Racking up billions in fines and legal bills has been a huge incentive for banks to change behaviour, and the arrival of Markets Abuse Regulation (MAR) in Europe has raised the stakes further still. Hiring an army of compliance staff to implement the endless regulatory requirements put in place since the financial crisis of 2008 was just the first step, installing alert systems to hunt out key words was the next, and now comes the need for comprehensive, fast and intuitive analysis.

MAR will redefine surveillance. New asset classes are introduced with particular focus on OTC products such as FIC and commodities trading. There is prescriptive clarification of what the European regulators interpret manipulative behaviour to be, throughout the trade cycle. Firms now have to include not just executed trades, but initial orders, modifications, updates and cancellations. In conjunction with new requirements under MiFID II, keeping tabs on social media, emails, instant messages, news headlines and even audio data will change surveillance from voice recording to multi-media data management.

There is now not only a deluge of data to manage, but different types of data to survey – unstructured as well as structured data. Random reviews of phone calls and emails missed tell-tale signs which might have prevented the recent Libor and FX scandals. Firms understand they now require a holistic overview to rise above internal siloed structures to understand firm wide risks detected by behavioural profiling. But above all, firms have to remain agile and adept to change.

Tried and tested correlations cannot be written in stone. Trading environments and their participants change, as does the perception of their actions when portrayed with a different backdrop. Searching for “hot words” in a conversation in isolation is a blunt instrument and will only take you so far. By cross-referencing trades, inputting market data benchmarks, IM, social media, news headlines – all of a sudden a single conversation may have a very different meaning. The Libor and the FX scandals taught us that and firms are still being fined to the tune of billions of dollars.

Only a coordinated cross-silo system combining historic, real-time and predictive analytics, and in visualised form, can help firms uncover the full picture. But this is not an easy fit for many firms. How do you incorporate multiple asset classes when systems are not automated, without convenient audit trails and timestamps? The sheer magnitude of structured and unstructured data to be collated is huge and increasingly complex. Traditional disc-based storage to deliver end-of-day batch alerts is no longer sufficient. Accessing the right data at the right time will require increased standardisation, as well as hybrid storage offerings to provide fast and accurate interrogation of data.

Today’s markets absorb fast, big data from silos of asset classes across time zones and geographies. Surveillance will increasingly mean watching for patterns that signal risk or opportunity, and then pre-emptively creating actionable insight. Interactive dashboards on which risk reports can be manipulated and subjected to ‘what-if’ scenarios are imperative. From such high-level alert reports compliance officers can then delve in deeper to assess a firm’s greater exposure and any potential knock-on effects, as well as whether any individual trader is going rogue. MAR Article 12 includes “Inclusion of false or misleading signals” to price securing and indicators – meaning that shutting the stable door after the horse has bolted is not an option.

As the regulators themselves are increasingly gathering more and more trade data – regulators want information that is fast, detailed, comprehensive and consistent. Banks must respond quickly to unexpected demands for risk assessments based on detailed and consistent data for all their different units and business lines – in a matter of hours or days, rather than weeks or months.

Today’s surveillance capabilities have largely failed to meet expectations from regulators. The chances of them coping with tomorrow’s demands are zero. Banks are already braced for the requirements of regulators to intensify and accelerate, meeting the requirements for MAR is just one more step on the road to the new world of surveillance.

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